KROSS AND DOUGLAS C H R O E D E R I S INTRODUCTION This research investigates whether small firmsâ stock return responses to fourth quarter earnings announcements are different from their responses to interim earnings announcements. This study is motivated by a concern expressed by former SEC staff and by the discovery of the âaccounting size effectâ.â A former SEC staff member reports that the staff believes that the interim earnings announcements of small firms may be less realiable (i.e., have lower precision) than their annual earnings announcements.2 Their concern relates to the auditorâs âtime in residenceâ. The auditor, present only for a relatively short time at small firms, audits only the annual numbers and may have little or no influence over the interim figures. Management is thus less constrained in its ability to âmanageâ the financial statement numbers for the interim quarters. If the market also believes that interim earnings numbers have less integrity than fourth quarter earnings numbers, then the stock return response to small firm interim earnings announcements should be different from the response to small firm annual earnings announcements. This situation is less of a concern for large firms, however, because the enormous
Journal of Business Finance & Accounting – Wiley
Published: Dec 1, 1990
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